Casino-related stocks struggle amid slow recovery of China’s outbound tourism

Newly-opened casino at Inspire expected to adversely affect existing operators

By Anna J. Park

A slow recovery in the number of Chinese tourists heading to Korea is contributing to a lackluster performance of domestic casino-related stocks, according to industry analysts Sunday.

Major companies that operate casino businesses, including Paradise, GKL and Lotte Tour, each plunged by 24 percent, 29 percent and 38 percent, as of Friday’s closing prices compared to six months ago, according to the Korea Exchange.

The three stocks each soared and remained high until September last year, following the Chinese government’s decision to lift its ban on group tours to Korea in the middle of August last year.

However, contrary to the local tourism industry’s hopes for a quick fix, the recovery rate of Chinese tourists visiting Korea slowed down in the fourth quarter of last year.

The number of Chinese tourist arrivals at Incheon International Airport in the first quarter of last year was 12.5 percent of that in the same quarter in 2019, followed by 32.7 percent in the second quarter and 54.2 percent in the third quarter. However, the figure fell to 53.9 percent in the fourth quarter.

As a result, the casino sector’s earnings in the fourth quarter of last year fell below market expectations. Paradise posted quarterly revenue of 241.1 billion won ($182 million) and an operating profit of 33.4 billion won year-on-year in the last three months of last year, both figures failing to reach their market consensus of 268.5 billion won and 35.8 billion won, respectively.

GKL’s quarterly revenue in the fourth quarter decreased to 90.7 billion won, a 2.2 percent year-on-year fall, while its operating loss turned into a deficit against market expectations.

Furthermore, the opening of Inspire Entertainment Resort in Incheon last November caused a short-term impact on existing domestic casinos, particularly Paradise, which is located in the neighboring area.

“With the entrance of the new casino player in close proximity to Paradise, its short-term marketing expenses are likely to increase, as direct competition is inevitable,” Lee Hwa-jeong, an equity research analyst at NH Investment & Securities, said.

As a result, analysts are lowering their target prices of casino-related stocks. According to market tracker FnGuide, the average target price for Paradise decreased from 21,000 won to 19,000 won last month. Altogether, five securities firms, including Hana, KB and Kiwoom Securities, have all recently lowered their target prices for Paradise.

The average target price for GKL also dropped from 21,417 won to 18,286 Korean won in the past month.

Yet, analysts point out the possibility of casinos in Korea attracting new customers with the opening of the first American-owned casino resort in the country.

“Rather than expecting a deterioration in performance due to intensified competition, the industry anticipates positive spillover effects from the expansion of its entire market size in the long term. As Inspire Casino focuses on North American and Japanese customers, contrary to Paradise being focused on Chinese and Japanese customers, it’s akin to attracting new customer groups,” Lee Jun-ho, a researcher from Sangsangin Investment & Securities, said.

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